We made it through the spending season mostly within budget, but there are a couple areas I’ll need to review in planning next year’s budget, and the corresponding contributions to our Christmas sinking funds.

In years past, we often blew through the budget and financed the remainder of our gift purchases on a credit card. Judging from the amount of swipes I saw in the check-out lines, I can assume we were not alone. Even in what most consider to be a fragile economy, there didn’t seem to be a shortage of shoppers willing to finance Christmas on their credit cards this year.

Assess the Damage

I’ve found the best cure for a holiday spending hangover is to address the damage head-on. No avoiding the bills until January 30th. No pretending it didn’t happen.

Between now and January 1st, figure out where you stand – how much damage was done. Did you blow through your budget and now find yourself low on cash? Did you rack up more credit card debt than you intended? Maybe a little of both?

Use Mint.com, or even a homemade spreadsheet, to take an updated inventory of your household finances. If you are able to transfer some money from savings, without jeopardizing your emergency fund, consider paying off your credit card debt before the New Year – debt free is a great way to start a new year!

If you don’t have enough cash around to pay off debt in one fell swoop, now is the time to devise a debt repayment plan for the coming year. How much will you have to pay each month to be debt free by April? Don’t let holiday debt hang around; it winds up becoming permanent debt, and two years down the road you’ll find yourself still paying interest on Christmas 2011 purchases. Not fun.

Update Your Plan for Next Year

Once you have addressed the damage done this year, consider updating your holiday spending plan next year. We underestimated our budget a bit for presents to extended family members and friends for which we wanted to give a gift. We also underestimated our “giving” budget, as we felt compelled to help beyond that for which had saved.

I don’t regret either decision, but I do want to build it into next year’s budget, because the earlier you start planning for a big expense, the easier it is to save for it.

Consider the following example:

Let’s assume next year’s Christmas shopping budget will be $600. If we start saving now that looks like $50 a month for the next year. If we wait until July, we’ll need to save twice that amount, $100 a month, to hit our goal. That’s a big difference. And it isn’t like Christmas sneaks up on us; it comes around every December 25th.

If you haven’t already created a separate savings account for these types of annual (or nearly as infrequent) expenditures, I highly recommend it. We have an online savings account that allows us to create a sort of subaccount where we save for infrequent expenses like car tag renewals, Christmas shopping, quarterly estimated self employment taxes, etc.

The sinking funds are funded by small contributions all year long, and when the expense is due, we simply transfer the money to our checking account and pay for it with cash. This has a way of smoothing out large budget blips, and reducing the likelihood of a spending hangover the next time around.

Before the New Year has us back in “holiday mode,” take a few days to reflect on this year’s holiday season. Hopefully, gifts will play but a small role in those memories, and instead you have happy memories of time spent with loved ones.

Unfortunately, that emotional decision required me to get student loans for the first couple years so I could finance tuition costs. I scraped up enough other money for incidentals (books, utilities, pizza, football tickets – you know, the bare necessities), and my mom managed to cover my housing – even my apartment rent when I moved off campus my sophomore year.

I eventually returned home and bounced around some before finishing my degree online. Over the years I worked full time, took advantage of a tuition reimbursement program (which eventually went away in the months following 9/11, when the economy went south), and finally managed to graduate with minimal debt.

Upon graduation, one of my life goals became helping my kids finish college debt free. I knew I had to start planning, and saving, early. We have opened 529 plans for our kids and try to sock away some money as we can.

We also plan to use a combination of the following strategies to help them reach the goal of a debt-free education.

5 Ways to Minimize Debts While in School

1. Choose your school wisely. Unless you plan to study a very specific field with minimal offerings from most schools, it probably makes sense to consider an in-state school, where tuition is usually a fraction of that at an out-of-state school.

2. Consider a 2-year degree path at a local college for core requirements. Looking back, I wish I had stayed home the first couple years, attended a local school and worked to save towards my four-year degree costs. If you go this route, first verify that your ultimate school choice will accept transfer credits from the local college or university you plan to attend.

3. Work while in school. In a perfect world you would not have to work while in school. You could devote 100% of your efforts into getting your education. But let’s face it; this is not a perfect world. Few parents can afford to send their kids to school and cover 100% of the financing.

Your education is ultimately your responsibility, so if you want it bad enough, you can get a job and subsidize some of your costs. You’re building your resume and developing work ethic – two things you can’t get from school anyway.

4. Take a year off after high school. This is a controversial idea, and I know there is a risk if you take time off you may never return. I get that. However, I left for college when I was still 17 (had a late birthday). I still had lots of growing up to do, and looking back I probably would have benefited from another year to mature.

I also could have worked that year and cash-flowed my first year of college, giving me a head start towards a debt free education.

5. Take classes during the summer and graduate early. If you can swing it, plan to stay on campus during the summer and take a couple classes. You will graduate a semester or two early, which translates to less meal plans, less rent for that off campus apartment, etc. In my experience, I also found relaxed professors and graduate assistants and an overall more relaxed environment than the hustle and bustle of fall semester.

Three years ago I wrote about the coming bubble from student loan debt, and I still believe graduate indebtedness will be one of the larger financial problems for the next generation. In a small way, I’d like to help reverse that trend.

Introducing the Frugal Dad Scholarship 2012

That’s right; we’re offering a Frugal Dad Scholarship ($5,000) twice annually to a deserving student. For full details, requirements and an application, visit the Frugal Dad Scholarship page. I look forward to reviewing your submissions and awarding our first scholarship!

Since I was blessed to be around strong doses of equal parts wisdom and healthy skepticism growing up, I look at things much differently than most people in my age bracket. Some may call it pessimism. I get that. In fact, I have to be careful not to take a glass is half empty approach to all of life, for I have much to be happy about and I remind myself of that frequently.

However, I’ve also learned that in many areas of life it pays to put an ear to the ground, listen for the sound of the thundering herd coming, and run in the opposite direction. The “herd” is comprised of those that often blindly follow conventional wisdom.

The Financial “Herd”

In financial terms, you may remember members of the herd buying into tech stocks in the late 90s after months of ridiculous gains. They were late to the party, but wanted to join in and got creamed. More recently, the herd turned to housing, and before 2008, housing prices were sky-rocketing, and people were feeling good again a decade after the tech bubble.

Then the fall of 2008 came and went, and in its wake left many folks in underwater mortgages. Some managed to hang on, others (very few) benefited from a loan modification program, and a large majority simply had to foreclose because they couldn’t keep up the high payments, and couldn’t sell for what they owed.

My Years in the Herd

In my early 20s I followed the herd. I borrowed money when I was 20 to invest in a Roth IRA because I heard on the radio it was simply too good an investment opportunity to pass up, even if you had to borrow money to do it. Well, it is a good investment vehicle, but in my opinion, not so good that is worth borrowing the money to invest.

Around this time I also opened several credit cards in college because the herd was doing it, en masse, at football games, and other campus events. We traded in fiscal discipline for a free t-shirt, or a pizza. Bribery works with college kids, and credit card companies know it (and so do the colleges that allow them on the campus).

How I Finally Broke Free

Fortunately, I returned to my senses, and my old frugal ways before digging a hole so deep I could never climb out. We did eventually climb out, after years of scratching, clawing and fighting to pay for past financial sins. It was not a fun time, and our family adopted a saying, “Never again.”

After turning 30 I realized an entire decade had raced past me with little to show for it, financially. I was blessed to have a wife and two children, and a secure career, but I spent much of the decade treading water. That’s not really true. I was underwater, but able to come up for air just often enough to keep from drowning.

It was time to get back to the basics – old school personal finance with a paper household ledger, an envelope system for budgeting and living on cash. Gone were the credit cards, the student loans, the personal loans I foolishly used to invest, and all other “fancy” financial tools.

I recognized that for too long I had followed the herd. I thought car payments and credit cards were normal. I figured everyone borrowed money on their home, paid a little down, and then borrowed more money for a bigger home. I figured most of my friends, also in their 20s, weren’t concerned with retirement savings and emergency funds. In short, I lived it up.

To turn things around, I started living by the following what you might call “contrarian” principles, and over the last few years, it has paid off (or at least kept me relatively safe through the biggest financial storm in my lifetime…so far). I started observing conventional wisdom in a new way. I became skeptical of those pitching the next hot stock, flipping houses, and encouraging people to borrow their way to wealth.

I started paying more attention to our nation’s fiscal health, and considering the trends being repeated from the past. I don’t claim to possess some prescient skill to see into the future (else I’d be a very rich man), but there were some trends that just seemed large to ignore.

It was around this time (Christmas 2007) that I started this blog, primarily as a way to keep myself accountable. I knew what I was writing wouldn’t be popular, but I thought if things hit the fan, it just might be one day. Heck, I even remember bashing those stimulus rebate checks the government was handing out early in 2008 – remember those? Yeah, that was a popular stance at the time.

Besides managing to tick off a few people along the way with my blog ramblings, I did learn some real lessons throughout the journey and continue to apply them today.

Pay Off Debt When Everyone Else is Borrowing

This was especially popular in 2005 up to the recession. At the time we were leasing a house, and still had debt. I couldn’t begin to count the number of people who told us we were stupid for “throwing money away on rent.”

We didn’t buy our home until March 2009, when we were on solid financial ground, and after prices had already depressed significantly. My only regret – if I had waited a little longer we could have got a sub 5% mortgage, but you know what they say about hindsight.

Pay Off Debts When Consumer Spending and Borrowing is Increasing

When we started our debt-free journey after Christmas in 2007, things were still pretty rosy, economically. The herd was at the malls shopping and borrowing there way into oblivion, and refusing to save a nickel of their income.

When the first hint of economic slowdown appeared the government sent out stimulus checks, and encouraged people to “get out there and spend!” Most people followed orders. We put half of ours in the bank and the other half on credit card debt.

Pay Down Your Mortgage and Stay Put When Everyone Else is Trading Up

A few years ago, it was a popular move to fully leverage your home via maxed out home equity lines, thanks to unnaturally high home values and falling interest rates. Others who didn’t tap equity just traded up to a bigger mortgage – after all, rates were on the way down and times were good.

Unfortunately, many of those same people are struggling to make a mortgage payment after losing half their household income, and seeing their investments wiped out (but more recently re-inflated).

Work a Year or Two and Save Up Money to Attend School While Others Borrow Thousands in Student Loans

This one is always popular. I believe one of the biggest economic threats to the next generation is student loan debt.

New graduates face a crushing debt that will be with most of them for the first decade out of school, limiting their ability to enjoy solid financial footing until well into their 30s.

It isn’t all the students’ fault, either. Colleges and tuition boards have increased rates at a ridiculous pace because, well frankly, because they can. The student loan industry has been nationalized and colleges know they can charge ungodly tuition because students can borrow the money from the government.

If there were less easy money to be borrowed, colleges would have to once again compete for a family’s dollar, and tuition would likely come down. Not going to happen, so make plans now for your kids (or yourself) to find a way to get educated without going thousands into debt.

Buy What Everyone Else is Selling (and Vice Versa)

This is where my personal investment strategy has really changed over the years. I used to stay glued to CNBC and investment newsletters to try to get a scoop on the next big market. Then it occurred to me that by the time I read about it, or heard about it, those with big money had, too.

This is when I became sort of a contrarian investor, if there really is such a thing. Wikipedia sums up a contrarian investor’s philosophy quite well.

In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.

So, I adopted my own two-pronged investment strategy. I would become a dividend investor – buying stock in strong, dividend-paying growth companies in industries that did well in both good times and bad. I would reinvest those dividends to build my positions in these companies, and one day, we just might be able to live off the dividend income alone.

I would also invest a smaller percentage of money (because there is more inherent risk with this approach), in stocks with strong fundamentals, but that had been beaten down thank to negative publicity, natural disaster, or were just oversold as part of the Great Recession. This led me to sectors like:

• Regional Banks. Many regional banks did not accept TARP money, maintained healthy balance sheets and avoided toxic mortgage markets in smaller locations. But, they still got beat up in the financial sector meltdown.

• Housing market. The housing market touches so many secondary markets besides the home builders themselves, who have been largely decimated the last couple years. Home improvement stores took a hit, too, and I thought rather unfairly, considering more people would be staying put and investing in home remodels, etc. when the worst was behind us. I joke with my wife that you can get a pretty good read on the local economy by visiting a Lowes (I used to work at one, part time) or Home Depot early on a Saturday morning.

• Nuclear Power. In the wake of the Japanese earthquake and nuclear disaster, nuclear power stocks took quite a hit, and one could easily understand why. During the threat of a full reactor meltdown, who wants to bet money on the future of nuclear power. Same thing happens after coal mining disasters, oil spills, etc. The fact is, we need some of all three types of energy to meet demand. I certainly don’t sit around hoping to profit from a disaster, but you have to be willing to buy when everyone else is selling, if (1) you can afford to lose money on paper in the short term, and (2) you know enough about a company’s fundamentals to believe the stock really is cheap.

This whole contrarian approach to finance won’t make you very popular at dinner parties, but it just might help you avoid debt and build wealth. For that, I don’t mind occasionally being called a “party pooper.”

*According the photographer, this picture was taken on January 1, 2009. Since then, we’ve added nearly $2.5 trillion to this figure.

What used to be practically an automatic stamp of Congressional approval (the debt ceiling has been raised 74 times since 1962, 10 of those times since 2001) has now become a line in the sand some conservative politicians have refused to cross.

Experts disagree on the outcome of a failure to increase the debt ceiling, but it seems the worst case could be a default on the debt already owed, resulting in an increase in the cost to borrow future dollars. Repayment of existing debt would be difficult without raising the ceiling because much of the new debt is created to pay interest on debt we already owe.

Imagine asking for limit increases on your credit cards so you can borrow money to pay your other credit cards. Well, multiply that example by a trillion and you can understand the magnitude of the problem.

My Personal Debt Ceiling

Rather than worry too much over things I have little control, I have instead decided to focus my energy on my own personal debt ceiling. My personal “line in the sand,” an amount beyond which I refuse to borrow.

My own debt ceiling has shifted a bit as I’ve matured, financially. I suspect that’s the case for most of us. Some may raise their debt ceiling as they grow older, believing in the idea that having debt is normal – you can’t buy a house or a car without debt.

Others have recognized early on that being in debt stinks, and vow to never go back. We found ourselves in the latter category, and spent a couple years clawing our way out of debt. Our new family motto when it comes to debt – “Never again.”

Debt Creep

When I was young I used to read stories about people being $10,000 in debt. I couldn’t imagine how much that must have weighed down borrowers. These days, it’s nothing to hear of people owing over $100,000 in student loans and credit cards, or $400,000 on a mortgage, or $50,000 for a new car, or $30,000 on credit cards.

The numbers that are tossed around are as mind-boggling as the discussion on the aforementioned national debt – now some 14.2 trillion dollars and counting. Just how much is a trillion dollars anyway? One trillion is the equivalent of one thousand billions, or one million millions. And we owe 14 trillion! See what I mean by mind-boggling?

Much like dieters hitting a 200lb. (or 300lb.) reading on the scale, I assume most of us have a number in mind that we aren’t willing to cross when it comes to borrowing. A debt threshold. A number, that when approached, finally causes us to change our behaviors and consume less.

For many of us recovering spendthrifts that acceptable debt threshold is zero. For others, a couple thousand on a credit card doesn’t seem too bad as long as they are making substantial payments.

Unfortunately, for a large percentage of our population, that number has increased significantly over the years. Consider the following statistics shared in a recent post at Man vs Debt, Upside-Down Nation: How Debt Fueled Our Madness:

Average 1970s One-Income Family:

$32,000 inflation-adjusted income
Saved 11% of their take home pay on average
Paid 1.4% to revolving credit, such as credit cards or lines of credit.

Average 2005 Dual Income Family:

$73,000 average income
Saved nothing (0%). (Actually, U.S. had a negative savings rate overall at this time.)
Paid 15% to revolving credit, such as credit cards or lines of credit.

Sad. So in three or four decades, as a society, we have doubled our average income, saved nothing, and now spend ten times as much on consumer debt as we did 40 years ago. And notice this study initially only included “one-income” families. Many more households today are two-income households. Some by choice, but many out of necessity – to support an inflated lifestyle. For most families, living on one income has become nearly impossible without making very difficult choices.

We live in bigger homes, drive more expensive cars, and pay more for education. We abandoned the idea of a “starter” home when starting out, as recent generations have felt an obligation to keep up with their parents, or the Jones’, or some independently wealthy 26 year-old heiress they saw on television.

We even have television shows celebrating the idea of newlyweds signing over their financial futures in the form of near half-million dollar mortgages.  

Read: My First Place on HGTV: How to Spend Your Next Thirty Years House Poor.

For now, I think I’ll keep my personal debt limit at zero. Sure, I use my credit card here and there throughout the month to pay utilities, etc, but the day that bill arrives it’s back to zero. I recently bought supplies for a DIY home remodel, and the large expense plus our normal monthly bills pushed the balance well over $1,000.

When I opened the bill, my heart beat a little quicker. I could feel the anxiety welling up inside me. I remembered that same feeling when I used to open similar bills from several credit card issuers. And I hated it. I immediately paid off the credit cards with an online transfer. Never again.

“Paying off any high interest debt will save you money in the long run, but it can be pretty tempting to buy something frivolous with the money, especially if you weren’t expecting it.

I feel completely different about the money that I’ve worked really hard for, than something like a refund that I wasn’t counting on. I really want to buy an Ipad, but i’m going to do my best to resist that urge.”

I can relate to Ross’ comment, and wondered if others shared our reservations to frivolously spend money we worked to earn, but feel more temptation to spend money we receive unexpectedly. Of course, one could make the argument that a tax refund is simply a return of money you have already earned and overpaid (assuming you paid taxes at all). In that sense, it is a little different than inheriting money or lottery winnings, etc.

Back to the original idea. Many times financial planning types suggest taking 10% of an inheritance received, or some other type of windfall, and doing something fun with the money. Take a vacation to visit a place you’ve always dreamed of seeing. Buy something of your heart’s desire, even if it isn’t very practical.

I generally think that is good advice, but only if you stop at 10% of the windfall amount. The problem is, many who find themselves on the receiving end of a windfall allow it to change their lifestyle. The expensive, once-in-a-lifetime luxury vacation becomes a once-a-year expense that eventually drains savings accounts and can lead to the accumulation of debt.

It also begs the question: Is it easier to spend money you didn’t have to work for? After all, when you apply a real hourly wage concept to your earnings, it may not be worth X amount of hours worked to pay for that trip to Tahiti.

There are some who would scoff at the very idea of spending any percentage of the money frivolously. I can understand that argument, too. After all, there are plenty of things most households could do with the money to better prepare themselves financially, such as.

• Getting out of credit card debt
• Eliminating some or all of your mortgage balance
• Setting aside a one-year emergency fund
• Setting up sinking funds for known future financial events such as insurance renewals, tax payments, annual Christmas shopping, etc.
• Investing for retirement, or future college expenses for kids
• Preparing an emergency stockpile of food, water and basic household goods

In an effort to maintain some balance I would probably do a little of both. I would spend a small portion of the windfall on something I really wanted, but I would lean heavily towards investing the money into something that would continue to provide a return long into the future.

That might mean paying off any consumer debt I owed, or dropping some money into a few quality dividend stocks that would spin off income for years to come. Better yet, it might make sense to eliminate a chunk of our mortgage. That would be like getting an immediate 5% return on the money through saved interest.

One last option would be to do nothing. Just let the money sit in a money market account safely drawing a small amount of interest. We live in an era where people are encouraged to be doing something all the time with their money – actively investing it, monitoring it, counting it, etc. However, often the best move is to simply do nothing.

Unfortunately, I ignored many of their lessons with regard to money and spent much of my 20s digging out of debt. I certainly don’t want my own children to repeat these mistakes, and I believe it may be harder for them to dig out.

With all the economic turmoil going on, I realize being fiscally responsible will be more important (and more difficult) for my children as they grow into adulthood.

Parents have always had to battle things like unrealistic media portrayals and an overall culture of consumerism. But layer on top of that the ridiculous levels of debt we’ve piled up as a country, and their future looks a little less certain.

Put another way, our kids probably won’t have the backstop we had. It’s doubtful social security will be around. Who knows where health care will wind up. Taxes are likely to be higher, and at least in the near term (meaning the next 5-10 years), things will probably cost more thanks to inflation, currency devaluation or some combination.

But it isn’t all negative. There will still be opportunities for our kids. People will still be needed to teach, to build things, to design building and bridges and roads, to provide health care and nursing and rehabilitation. To work on cars, to serve in the military, etc, etc.

However, to take advantage of those opportunities, our kids must first set themselves up for success. With all that in mind, I offer up:

10 Things I am Trying to Teach My Kids About Money Before They Reach Adulthood

1. No one owes you a thing. Too many people go through their entire lives with the expectation they are owed something. This is not the case, or at least it shouldn’t be. All you should ever expect is to be judged, compensated and respected based on your work ethic and your ability to create, inspire and hustle.

2. Debt is a cancer. Debt is a cancer on our society, on households, and on us as individuals. It saps creativity. It creates pessimism. It robs your future dollars. It limits your freedom. Avoid debt like the plague. Remember the old adage:

“He who understands interest – earns it. He who doesn’t understand interest – pays it.”

3. Save for emergencies…big emergencies. When you are young and many years from considering retirement (and not earning much), it’s tough to save money. But I have discovered no softer pillow than having money in the bank for emergencies. Aim to save about a year of your basic living expenses in a simple savings account (no risky investments here). With a one-year cushion, you’ll be able to weather storms many others will not.

4. Live simply. In 2011, life seems pretty complicated. By the time you are adults, I imagine it will be even more so. There will be new gadgets and toys and cool services and “got to haves.” The problem is, all these things compete for your earnings. I’m not advocating living like a pauper, but limit yourself to only a few of life’s luxuries.

5. Sleep on big financial decisions. When it comes time to buy a car, or a house, or book your first major vacation as a family, sleep on the plans for a couple nights. People selling you these things want you to act immediately to lock in their commission, as I would expect them to, but remember that you are the one who has to pay the bill. Some of my biggest financial regrets came because of a knee-jerk reaction. Be slow. Be methodical. Listen to your gut.

6. Protect your credit. Not because you hope to borrow money, but because you may find people extending a service to you may do so for less cost if they think you aren’t a big risk. And if those people don’t know you well, your credit score may be their only determining factor. It’s not necessarily fair, but it’s a part of life. Credit blemishes can hang around for a decade, so it’s best to avoid them in the first place.

7. Learn to do things yourself, but don’t be afraid to call in the experts. You may remember the time your dad rescued a toy from the toilet trap, saving us an expensive plumbing repair bill. Or the time I climbed up in the attic to unclog the air conditioner drain. But your dad knows his limitations, and calls in the experts when necessary. That’s what emergency savings are for.

8. Shallow people judge your things, real friends judge your character. Some of the saddest, loneliest people I’ve ever known have been surrounded by the nicest things money can buy. They often acquired these things to impress people they thought mattered, and in many cases it did – temporarily. Meaningful relationships are based on things money cannot buy: trust, respect, integrity, compassion, love.

9. Don’t trade the things you care about for a big salary. Remember what mattered to you most when you were a kid: Family, fun, dreams. These things should remain important to you as a grown-up, but often adults sacrifice these things to earn a big salary. Now, everyone has to sacrifice some to earn a living, but by learning to be content, you may be able to earn a comfortable living while still enjoying other things.

10. Start saving early. Remember those money games we used to play when you were a kid? One of them was an attempt to get you to understand one of the great financial wonders of the world: compound interest. You see, when you save money you earn interest on it. The next month you earn interest on the money you first put in, plus the interest you earned the month before. That’s right; you earn interest on interest. Now carry out that example for many years, even decades, and you can understand how some people are able to accumulate wealth. The trick is, you have to start early.

Parents, consider opening a kid’s savings account to get them started early. Our kids deposit a portion of allowance earnings every couple weeks and it has taught them a lot about the mechanics of banking – completing a deposit slip, balancing their savings register, etc.

Finally, keep in mind something your great grandfather taught your dad about finding balance. Be frugal, but remember to occasionally stop and smell the roses. Life is short, and it is meant to be enjoyed. Take an expensive vacation every now and then. Buy something of your “heart’s desire,” even if it doesn’t make sense financially. Be frugal in other areas of your life to make room for things you truly enjoy.

This post was included in the Family Finance Carnival at About.com: Kids and Money

Many of you may be familiar with Dave Ramsey. Jason has spoken about his financial philosophies, strategies for getting out of debt and establishing wealth here.

I’m also a fan of his work.  And as a health coach, I’ve found that his underlying financial perspectives are true for other areas of your life, most specifically getting out of poor health and into a rich life of sustainable, vibrant health.

Here are the 5 core lessons on financial peace that Dave Ramsey teaches which have clear correlations to healthy living as well.

1. Debt is Slavery

Dave often says that living in financial debt is like slavery. Every minute you work, that money earned is not your own, you’ve already sold it off.

Many moms I work with have the distinct experience of energy debt: the feeling of drain, exhaustion, and depletion throughout their day. They become addicted to energy crutches like too much caffeine or sugar just to get through the day. And these “crutches” actually keep us in a constant state of exhaustion and overwhelm because we are not tapping into true and sustainable sources of energy.

They are like the quick fixes (akin to credit cards) that give us an illusion that we are getting by, but in fact just under the surface we are falling farther and farther into poor health.
Establishing healthy and natural sources of gaining energy is a primary foundation of healthy, vibrant living.

2. Lasting, Permanent Change Takes Time

When you are interested in a monumental, sustainable shift in your lifestyle (whether it is getting out of debt or experiencing whole-person vital health), the truth is that change takes time. Dave’s work encourages making and keeping a budget, which takes a few months of testing things out, tweaking, and refining until a working system is in place that can begin to run smoothly.

And it’s the same with establishing wellness systems in your life. Eating healthy foods, caring for your emotional and mental health, nourishing your spiritual needs and tending to your self care needs must be part of a plan that works within the life you live.
And that wellness plan needs to go through a period of experimenting, testing, refining, and tweaking too. One size does not fit all.

If you want true health with freedom from the yo-yo dieting experience, you’ll have to take the time to come to know your unique needs, read the language of your own body, and creatively put that information into concrete and practical strategies that work in the life you lead right now.

3. You Are the Captain of the Ship

Dave makes it clear you must tell your money what to do in order for your money to work for you.

Likewise, in order to make your health and well being a priority, you’ll have to get used to telling your time what to do.

Trying to “fit in” aspects of health living is just not realistic in most of our lives. We may have good intentions, but it is essential to establish a clear plan for when and how we will do the things that we need in order to stay well.

From the start of your week or day, telling your time what to do, means you won’t be wasting time…which of course shouldn’t be confused with simply having down time. In fact, I’ve found that scheduling in proper down time helps me actually take it and benefit from it, without the sense that time is just slipping by and I’m still left feeling frazzled and scattered.

4. Go for Early Successes

Part of Dave’s program is to hit your debt with a snowball effect, and to start chipping away at the smallest debt you have so you can experience initial success and keep your motivation going. I’ve found the same is true for our health.

When we feel our long term health goals are too lofty and daunting then it is hard to keep motivated. But establishing smaller, short terms goals so you can feel the rush of accomplishment and success is essential to staying steadily on the path you want to be on.

It’s a basic principle I come back to that small, simple, and consistent steps in the right direction yield huge, powerful rewards. The magic bullet claims and quick fixes only serve as distractions that ultimately keep you stuck in the same place over time.

“Small steps, big results” is what my weekly email program called The Ripple is all about–if you aren’t on my list yet, you can get on here for free.

5. Common sense is the new sexy.

The principles of handling your money well that Dave shares are really time tested, traditional principles.

Steady and responsible movement toward real change is the fastest path to producing major rewards and reaching your goals.

Though the common sense banner doesn’t feel as sexy amidst all the glitz and buzz we are flooded with daily…I tend to think what is really sexy is great results that last and make a huge impact in your life.

I’m not shy about talking about payday loans. In other entries to my blog, you’ve heard me condemn them up and down, backwards and forwards. (Trust me. I’m not done yet.) I’ve even put them near the top of my list of financial Weapons of Mass Destruction. I can’t say enough about how destructive this kind of lending is. They don’t call it predatory lending for nothing, that’s for sure.

I’ve laid out before a number of reasons why payday loans are a flat out bad idea, so I thought I’d use this entry to go into deeper detail about maybe the most important part of what makes payday loans such a rip off.

The APR. Trust me, it’s absolutely, positively, astronomical.

The Basics of APR

I don’t want to assume everyone knows what I mean by APR, so let me frame it up for you quickly before I get too deep into why payday loan APRs are so horrible. Stick with me for a minute, and I promise – you’ll be able to see for yourself why payday loan APRs are not to be messed with.

APR stands for annual percentage rate. In summary, this is the rate at which your loan accrues interest. In plainer English, this is the amount of money you have to pay beyond what you were loaned. To the person who loaned you the money, this is the profit.

Simply having an APR isn’t bad. Most forms of credit and most loans are made profitable through an APR. It’s a necessary part of the credit industry.

What makes payday loan APRs so ridiculous is how high they are. Percentage rates on these are many many times higher than most other forms of credit reinforcing why you need to avoid payday loans at all costs.

Typical Loan APRs

As I mentioned, most forms of credit have an APR. The difference between traditional forms of credit (like mortgages, credit cards, student loans, etc.) and payday loans is that most traditional forms of credit have at least a somewhat reasonable APR, and a payday loan has an exorbitant APR.

For example, a typical credit card’s APR is somewhere between 7% and 36%. Now, I know that’s a big range, but it goes to show you where someone who doesn’t have good credit would be placed – out at the upper end of the 30% range. Please don’t get me wrong – that’s not, by any stretch of the imagination, a good rate. If you have credit cards at that rate, it might make sense to talk to someone about consolidating your debt. Our current Visa carries a rate of 9.99%, but also remember that we pay it off each month.

For a second example, a car loan APR is usually somewhere between 5% and 15%. 15% is certainly on the very high end, but again – I bring it up because it’s an excellent example of typical APRs, and will help to show you just how ludicrous payday loan APRs are.

As a third example (and then, I promise, I’ll show you some actual examples of payday loan APRs), let’s consider mortgage rate prices from January 2010 through to the end of October 2010. Over that period of 10 months, mortgage rates ranged from 5.21% to 4.19%. Keep that in mind as we move on.

It’s worth mentioned that car and mortgage loans are usually for large sums of money, so lenders can afford to charge a lower rate. They still make plenty of money. 4.19% of $200,000 is $8,380, and that’s before you take compounding into account. Not too bad for a few days work.

Some Actual Payday Loan APRs

How does 521% sound? That was the stated APR for a lady that I met with that was struggling with her debt. The was the highest rate she had, with the others all being above 300%. If you ask me, it sounds absolutely ridiculous. And that’s not even the highest it goes. Payday loan APRs can range from about 390% to 780%.

Did your jaw hit the floor yet? Well pick it up and make this promise to me and to yourself right now.

“I promise to NEVER get a payday loan. I promise to remember that there are other options, and to explore what they are before making drastic decisions about my finances.”

Trust me, they simply aren’t worth it.

We hear a lot about how Americans don’t save enough for the future, and how important it is to have an emergency fund for a rainy day. But we also hear a lot about the importance of getting out from under crushing credit card debt. So it’s only natural to wonder which is more important.

At first glance, you might think the answer is always “pay off debt first.” But there are a few things that you should consider before taking this advice.

1. Know Thy Enemy. Sometimes consumers do the wrong thing, for the right reasons. For example, given all the hair-raising news about eroding home equity and foreclosures, many consumers are pumping extra cash into paying off their home mortgage, rather than directing that money towards other more potentially dangerous debt like credit cards.

It is unwise to pay down your relatively low-interest, tax-deductible home mortgage, student loans, or business loans if you carry other more volatile forms of debt.

2. Break the Piggy Bank. As painful as it sounds, many times cashing in your low-interest savings account to pay off a high-interest credit card is the right choice.

Interest accruing in most savings accounts can’t keep pace with the interest accruing on a credit card account, so it is generally a wise move to raid the savings account to help get out of debt.

3. Divide and Conquer. When analyzing debt, carefully consider what motivates you the most towards repayment. Does paying interest drive you nuts? Perhaps paying off your highest interest rate card first make sense. Do you need some quick wins? Maybe you should pay off a couple low-balance cards early in your plan. However you decide to do it, figure out a way to single out one debt and make it your top priority.

Pay the minimums on your other cards until you slay the beast with the highest interest level, the highest emotional involvement (a personal loan to in-laws, for example), or the lowest balance (following the debt snowball method). Then move to the next worst offending debt and so on.

4. Know Thyself. There are two schools of thought regarding saving vs. paying off debt. One school of thought is that you should pay off the debt entirely before beginning a savings regimen. This works well until the bottom of your hot water heater gives way unexpectedly and you wind up with a hefty cleanup charge, which might lead to a credit card tailspin.

If you are the type of person who can stick with a payment plan, regardless of occasional setbacks, you should pay of your credit card debt first. If you are more likely to be derailed and disheartened by an unexpected expense, it might be wiser to focus on creating a rainy day fun, while committing to a cash-only plan for new purchases.

Once a small nest egg is built, then the attack on debt can be renewed with more confidence.

5. Hands off the Cookie Jar. In the rush to get out of debt, some people consider tapping into or liquidating their 401(k) or IRA funds. This is a poor personal finance move, since not only will you be gouged by Uncle Sam upon withdrawing the funds prematurely, you will also be losing the long-term impact of those funds on your overall financial well-being.

Some folks might stop short of cashing in their retirement funds, but instead decide to take a loan out against their 401(k). This can be a viable option for a disciplined borrower, but beware that failure to payback the loan from your 401(k) in a timely manner can result in weighty tax consequences and stiff penalties. Also keep in mind if you are laid off, or you decide to switch jobs, the loan may be due in full immediately.

For those tackling debt, how have you decided to go about it? Save first, pay off debt, or a little of both?

To answer that question, we must first consider the less obvious answer: some people don’t care. Seriously. They are apathetic, believing debt is just something people are supposed to have. After all, who can afford to buy a house or a car with cash, and even if they had enough, who would want to drop that much cash on such a large purchase?

Ignoring for a moment the side argument on whether or not it makes sense to pay cash for a home, I can understand how people have come to accept debt as normal.

Unfortunately, we live in a debt-driven society. We are told to get out and spend to resurrect our economy, even when we don’t have the money, or prefer to save it for a rainy day (and even when we see storm clouds gathering on the horizon).

A Debt-Driven Society

We are inundated with advertisements from credit card issuers, banks, car dealers and on and on. Our media is saturated with messages that make us feel inferior, or somehow inadequate, if we don’t own the latest gadget, a bigger house, a fancier car, nicer clothes, more bling, more toys and more payments (OK, so they don’t advertise that last one).

The only way to break yourself and your family free from the vicious cycle of debt is to finally scream ENOUGH! Enough of the marketing. Enough of the feelings of inadequacy. Enough of being compared to others. It is time to start living withing our means, not the couple down the street with two sports cars, a boat, a bigger house and a condo on the beach.

I have nothing against those people, but I am not in competition with them either, because financially, we have little in common. We have more mouths to feed. We make different choices. We make less money because my wife stays home with our children. We forgo the trappings of today for the promise of financial independence in the future. And that is just fine with us. But it hasn’t always been.

For far too long we tried to keep up with those people by augmenting our lifestyles with debt. It was all a facade, and the funny thing about it was people probably expected that we were simply using debt to finance a lifestyle that they could afford, but we couldn’t. Who were we fooling? Ourselves.

Then one day I woke up broke with a dead end job, a wife and two kids and nothing to show for seven years in my first career but a pile of debt and high blood pressure. We decided it was time to quit fooling ourselves, and to dedicate our lives to a more frugal existence. If you can’t first be honest with yourself, you can’t be honest with other people.

It’s difficult to admit to yourself you’ve screwed up. But this admission is very important, because continuing a lifestyle of financial denial only leads to a bigger hole to dig out of down the road. Like the saying goes, when you find yourself in a hole, stop digging.

STOP…

• paying minimum payments on your credit cards.

• writing balance transfer checks from one card to pay another (yes, I did it).

• getting cash advances from ATM machines because having a wallet filled with cash makes you feel rich.

• shredding bills without even opening them because you’d rather stick your head in the sand than face reality.

• reaching for your card to finance “emergencies,” sales and groceries. So many people rail against those dependent on the government, but are just as dependent on Visa and Mastercard. Don’t be a slave to big banks.

• opening credit card accounts for free t-shirts (been there), or 10 cents off a gallon of gas (done that), or some silly rewards program that accumulates points so you can exchange them for more crap to put next to the crap you’ve already stuffed inside your home using credit cards (done a lot of that!).

• turning to debt to finance cars because you lack the discipline to save cash for a car, or the discipline to buy a less sexier car. Cars do not define you.

START…

• finding ways to boost your income. Overtime, part time work, a side hustle, selling your crap all qualify as potential ways to get your income up. There is no shortcut to getting back to even.

• accepting responsibility for the actions that got you in debt. For years I blamed my employer, school, medical issues, lack of financial education growing up, etc. for my debt balance. How ridiculous. So many people have had it much worse, and managed to live within their means. So could we.

• educating yourself about personal finance. Much of what I’ve learned along the way I learned from reading. I checked out books at the library. I read magazines about money. I even watched and listened to media geared towards personal finance (radio shows, television shows, etc.). Turn off the football game, or the IQ-draining sitcom, and pick up a book about personal finances, or budgeting, or investing, or mutual funds, or insurance, or maybe even a biography about someone whose financial situation you admire.

• thinking about ways to get money working for you, rather than the other way around. How much better would your financial life look without debt? Create a dream budget and replace your debt payments with contributions to savings accounts, college savings funds, and your retirement account. Replace interest payments with interest income. Figure out just how much being a slave to debt is really costing you.

• reducing your monthly expenses to free up income to put towards debt repayment. Cancel the cable. Stop eating out. Shop your car insurance. Cut your own hair. Bicycle to or from work. Get radical.

So, You Want to Be Free?

Leading up to last week’s election a popular theme was personal and economic freedom. Some people think government is infringing on our freedoms. Others think government isn’t doing enough.

I say many in both groups are forgetting that they have already given up their freedom. They are totally dependent on banks to finance their emergencies, their businesses, and their households. They willingly sign away future paychecks in exchange for borrowed money.

Businesses turn to banks when they can’t make payroll. People ask for loans to pay off other loans, or loans to finance their education, or loans to finance an emergency car purchase because their other one just died. They often find themselves begging someone thousands of miles away in a call center for credit limit increases to finance emergency travels to care for a love one.

So if you really value freedom, you will join me in first ridding yourself of the bondage of debt. When you sign up for a loan, you are at the mercy of the bank and its well-crafted fine print filled with legalese and the many ways they can control you for the life of that loan. And if you don’t play by their rules, remember they have your credit held hostage, and they don’t mind reporting to the credit bureaus the first time you slip up.

The next time you have an emergency, you can still call the bank, but this time it will be to move a little money from your emergency fund to your checking account to cover the plumber’s bill, or the hospital, or from your business emergency fund to cover repairs on the company truck. No longer will you be at the mercy of those holding the credit. Now, you are truly free.